Banks Prospering -- In Most Places

Most banks rang up strong profit increases in the first three months of 1986, with the glaring exception of many institutions located in the depressed energy and agricultural belts of the nation.

``While the losses being suffered by banks in Texas, Oklahoma and some farming areas get the headlines, the great bulk of both large and small banks around the country have looked pretty good,`` said Jeffrey L. Cohn, banking industry analyst at Drexel Burnham Lambert Inc.

Keefe, Bruyette & Woods Inc., a brokerage firm specializing in bank stocks, estimates that average earnings of 170 money center and regional institutions followed by the firm will be up 13 percent in the first quarter from the year-earlier period.

``The strongest earnings gains are being shown by banks in the Southeast and New England,`` said James McDermott, the firm`s director of research.

``The weakest are in the Southwest. The pattern is quite mixed in the Midwest, with some Ohio banks showing strong increases.``

Stock prices of many banks have turned in an even stronger showing, reflecting the profit increases as well as a booming interest in banks as more states adopt laws that will permit acquisitions across state lines. The Keefe index of bank stock prices is up about 20 percent so far this year, McDermott said, in contrast to an 11 percent rise by the Standard & Poor`s index of 500 major corporate stocks.

Many large banks derived much of their profit gains from operations other than traditional banking. Thanks to soaring prices in the stock and bond markets, earnings from bond trading and sales of investment securities climbed sharply at many institutions. Many also did well in their foreign currency trading operations.

Demand for commercial loans was lackluster as the economy grew at a sluggish pace, however, and falling interest rates put pressure on net interest margins.

``Lower rates can be helpful to larger institutions which have control of the cost of their funds and pricing,`` said analyst Ray Garea, of Cates Consulting Analysts Inc. ``But community banks tend to have less control over their liabilities, since more of their funds often are in demand deposits.``

J.P. Morgan & Co., parent of Morgan Guaranty Trust Co., turned in the best showing among large New York banks with a profit jump of 42 percent from a year earlier. The bank scored a 90 percent increase in earnings from noninterest sources. Securities trading produced a profit of $58 million, up from $7.1 million a year earlier, while foreign exchange profits surged to $72.6 million from $23 million.

As a result, Morgan`s increased net loan writeoffs of $49 million

(against $14 million a year ago) went virtually unnoticed.

Morgan also led major banks with a 1.35 percent average return on assets. Its return on shareholders` equity of 22.1 percent was second only to a 22.5 percent showing by much-smaller American National Bank and Trust Co., a wholly owned subsidiary of First Chicago Corp. American National had a 1.3 percent return on assets.

Northern Trust Corp. showed the biggest percentage increase in profits, up more than 185 percent from a weak 1985 quarter.

First Chicago Corp. also rebounded from a weak quarter last year with a 58 percent increase in 1986 profits. All of the increase, however, came from noninterest operations. Foreign exchange profits were a record $24.2 million, in contrast to a $4.6 million loss a year ago. Trading and fee income also rose.

Continental Illinois Corp.`s net income rose 2 percent as the banking firm continued its slow comeback from a 1984 liquidity crisis. Its profits from securities and foreign exchange trading declined, but the firm achieved strong gains from the sale of equity investments and securities acquired in debt restructurings.

BankAmerica Corp. also returned to the profit track after losing $337 million last year.

One of the quarter`s biggest surprises was a 2.5 percent drop in profits reported by Citicorp, analysts said. The nation`s biggest banking firm more than doubled its loan-loss provision to $492 million, mainly to guard against possible losses from consumer loans and credit cards. ``It was overdue in taking the action,`` one analyst said.

As expected, many banks in Texas and Oklahoma sharply boosted their reserves to cover possible losses on loans to energy-related and real estate borrowers affected by the slide in oil prices during the quarter. As a result, BancOklahoma Corp. posted a net loss of $44 million, Texas American Bancshares lost $21.9 million and First City Bancorp, of Houston, lost $323.4 million. Many others showed steep earnings declines.

Analysts predicted the energy crunch and its ripple effects on other industries would continue to affect many Texas banks during the rest of the year even if the price of oil steadies at its current level.

``I think the major adjustments have been made at many of the banks,``

Cohn said. ``But I`m not looking for any big snapback. The oil industry has a road to go before it gets back to where it was five years ago.``

Garea also warned that Mexican loans remain a potential threat for some big money center banks.

``The drop in oil prices has helped two major Latin American borrowers, Argentina and Brazil, which buy most of their oil. But it has hurt the producers, such as Mexico and Venezuela,`` he said.

He noted, however, that U.S. banks generally have been receptive to a suggestion by Treasury Secretary James Baker that they advance more money to the debtor countries so that timely payments can be made on debt principal and interest.

``I would suspect that the banks will be especially responsive to helping a nation closest to our borders,`` he said in a reference to Mexico.